How to construct monthly VAR proxies based on daily surprises in futures markets

Lutz Kilian

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

Abstract: It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection. The standard approach has been to sum these daily surprises over the course of a given month when constructing the monthly proxy variable, ignoring the accounting relationship between daily and average monthly price data. In this paper, I discuss an alternative approach to constructing monthly proxies from daily surprises that takes account of this link and revisit the question of how to use OPEC announcements to identify news shocks in VAR models of the global oil market. The proposed approach calls into question the interpretation of the identified shock as oil supply news and implies quantitatively and qualitatively different estimates of the macroeconomic impact of OPEC announcements.

Keywords: Proxy VAR; IV; Shock aggregation; Time aggregation; Identification; OPEC; Supply news; Storage demand; Futures; Price expectations (search for similar items in EconPapers)
JEL-codes: C36 C51 E31 E32 E44 Q43 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001581

DOI: 10.1016/j.jedc.2024.104966

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